Vietnam: Moving Toward

The 3 Decade of
rd

Transition
And Development
Pham Chi Lan
Hanoi- Jan. 07th, 2010
• The first comprehensive reform initiatives or
“Doi Moi” were officially introduced in
Vietnam in late 1986.
“Doi Moi” initially focused on transforming the
economy from a centrally planned to a
market mechanism with 3 major contents:
 Develop a market oriented mechanism
 Develop a multi-sectoral economy
 Open up the economy

2
• Bold reform policies and measures were
introduced from late 1980s to early
1990s, and brought about fundamental
changes in Vietnam’s economic system.
As result in mid-1990s Vietnam get rid of
the crisis prolonged during 1970s-1980s.
The first decade of reform ended when
the financial crisis broken in Southeast
Asia, and Vietnam hesitated to introduce
further reform policies needed.
• When entering the 21st century the
reform program was aligned to
Vietnam’s blueprint for development –
the Comprehensive Poverty Reduction
and Growth Strategy (CPRGS).
CPRGS has 3 pillars: completing the
transition to a market economy,
making development inclusive, and
building modern governance.

4
• New reform measures were introduced in early
2000s. Vietnam’s economy gradually recovered. In
Jan 2007 Vietnam became a member of WTO but
with NME status.
The second decade of reform & development ended
when the global financial crises broken. Vietnam get
rid of a low income country status but economic
growth slowing down. Serious constraints, weakness
and imbalance in economic structures are widely
recognized. Bold reforms needed in the 3rd decade.
 Economic performance since
Doi Moi has been
impressive
• Annual GDP growth was 8.2 % during the 1990s,
7.5 % during 2001-2005, 8.47% in 2007, 6.23%
in 2008, and 5,32% in 2009.
• Per capita income increased from USD100 to
1,200 within 2 decades
• Dramatic increase in industrial development and
change in economic structure from agriculture
to industries and services

6
• Remarkable increase in job creation
• Impressive poverty reduction
• Private sector developed and became a
driving force for economic development
• Foreign direct investment (FDI) became a
major sector and an engine for growth
• Vietnam’s economy gradually integrates
into the region and the world

7
Industrial development and GDP
14
growth 1 2.0
12 1 1.1
10 .8 10 .6
10 .3 1 0.4
10
8 .7 8 .7
8 .3
8 7 .0 7 .2
6.3
6 5.5

3.8 3.7 3 .8 3 .5
4 3 .4

2 1.3
0 .2
0
B ìn h q u â n 2 0 0 1 - 2 0 0 5 2006 2007 2008 6 th a n g 2 0 0 9

N ô n g , lâ m , n g ư n g hCiệôpn g n g h iệ p - x â y d Xự nâ gy d ự n g D ịc h v ụ G D P

8
Structure of economic sectors (%)

9
 Model for growth in Vietnam so
far
Institutional reforms = liberation of resources
:and booming
+ Exploiting natural resources (minerals, land…)
Untied laborers: mobilizing huge labor force at low+
costs and poor quality
Booming of private sector : fast expansion in+
quantity but low productivity and low
competitiveness
Opening up the economy: export what available to+
)the world and get what most needed (capital
 … and result
Growth has been high,
easy to gain new records, but
•Low quality, efficiency
and competitiveness
•Weak business sector
•Inconsistent
institutional reforms
•Slow improvement of
macro management and governance
•Poor control on
distribution of benefits
•Exhausted natural
resources, environment pollution
•Inappropriate
investment in fundamental base for development (infrastructure, human
resource)
•Imbalances in
international integration process
 Motivation for growth: quantitative achievements
Pillars for growth: capital, natural resources, state-owned
enterprises (SOEs)
 Accept high costs for growth ( prolonged budget deficit at
5% of GDP, high & increased ICOR…)
 Growth rates have been high but not sustainable
 Serious structural problems, especially in market
mechanism, infrastructure, human resource, business
sectors, and capacity for development management
 Widening gaps between Vietnam and neighboring
countries in real economic growth and income
GDP, CPI and trade balance, 2005-
2010
20 25

18

16 20

14

12 15

10

8 10

4 5

0 0
2005 2006 2007 2008 2009
GDP 8.44 8.23 8.46 6.23 5
Nhập siêu 4.31 5.06 14.2 18.03 10
CPI 8.29 7.48 8.3 19.9 6

GDP Nhập siêu CPI

Domestic saving and investment (%
of GDP)
 0
1
2
3
4
5
6
7

-2
-1
1990
1991
1992

IC O R
1993
1994
1995

T F P c h an ge (%)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
ICOR and TFP changes, 1990-2007
Gaps between growth rates of output
and value added of the industry (%, at
1994 price)
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

GR GO of Industry GR VA of Industry Gap

16
 Backward export structure
World Export Market
Share (current USD)

Processed Goods
0.8% Semi-processed Goods
Unprocessed Goods
0.7% Services
TOTAL

0.6%

0.5%

0.4%

0.3%

0.2%

0.1%

0.0%
Source: UNComTrade, WTO (2008)
1997 1998 1999 2000 2001 2002 2003 2004 2005 200
 Cost of Doing Business in Vietnam,
Ranking, 2008 (of
181 countries)
Favorable 2008 Unfavorable

Median Ranking,
East Asia and Pacific

Vietnam’s per capita GDP rank: 70th

• Especially in land ownership in rural areas significant

problems remain
Source: World Bank Report, Doing Business (2008)
 Governance Indicators of VN & selected
countries
Voice and Accountability
Best Political Stability
country Government Effectiveness
Regulatory Quality
in the Rule of Law
world Control of Corruption

Index of
Governan
ce
Quality,
2007

Worst
countr
y in the
world s

h
ea

nd

a
re

a
a

am

n
a

a
na
an

l
n

os
ne

es
zi

di
si
nk

si

ta
si
pa

di
po

or

la
ra

hi
iw

ne

us

La
bo
ay

is
pi

ad
tn
In

La
Ja

ai
K

C
ga

B
Ta

ak
lip

ie
do

am
al

gl
Th
th

ri

V
in

P
hi

an
In
S
ou

C
S

B
S

Note: Sorted left to right by decreasing average value across all indicators. The ‘zero’ horizontal line corresponds to the median country’s average value across all indicators.
Source: World Bank (2008)
 Speeds of catching up - VN &
neighbors
Per capita real income relative to US
(Measured by the 1990 international Geary-Khamis dollars)
100%

Japan
80%
Taiwan

S. Korea
60%
Malaysia

40% Thailand

Indonesia
20%
Philippines

Vietnam
0%
1955

1960

1965

1980

1990

1995

2000
1950

1970

1975

1985

2005

Sources: Angus Maddison, The World Economy: A Millennium Perspective, OECD Development Centre, 2001; the Central
Bank of the Republic of China; and IMF International Financial Statistics (for updating 1998-2006).
 Per Capita GDP in 2004 ( ＄ PPP -WB
0
data)
5000 10000 15000 20000 25000 30000 35000
Hong Kong
J apan
Taiwan
Singapore
Brunei
S Korea
Malaysia
Thailand
China
Philippines
Indonesia
Vietnam
Cambodia
PNG
Mongolia
Laos
N Korea
Myanmar
East Timor
Green: participants in East
Asian production network
 Economic growth 1991-2011
Vietnam, China and India
Annual GDP Growth Rate, 1991-2011

China Vietnam India

16

14

Forecast
12

10

8
%

0
1991

1992

1996

1997

1998

2001

2002

2007

2008

2011
1993

1994

1995

1999

2000

2003

2004

2005

2006

2009

2010
22
Per capita GDP growth from over $200
Vietnam, China and Indonesia
Vietnam Indonesia China

1400

1200

Indonesia: 1968-2008
1000
GDP level in year 0 =100

800

Trung Quốc: 1983-2009

600

400

200
Vietnam: 1988-2009

0
10

12

14

16

18

20

22

24

26

28

30

32

34

36

38
0

8
Y

Source: WDI Years from achieving $200

23
 Prosperity performance
of Vietnam and selected countries
PPP-adjusted GDP per
Capita, 2007

$45,000
USA
Ireland
$40,000 Singapore Hong Kong
Switzerland
Netherlands Iceland
Canada Australia
Austria Sweden
$35,000 UK Finland
Germany Taiwan
France Japan
Bahrain
$30,000 Italy Spain Greece

New Zealand Slovenia

Israel
$25,000 Korea Czech Republic
Saudi Arabia
Portugal Estonia
Slovakia
$20,000 Hungary
Lithuania Latvia
Poland
Croatia Russia
$15,000 Malaysia Argentina
Mexico Chile Romania
Costa Rica
Brazil South Africa Turkey
$10,000 Thailand
Colombia
Egypt Indonesia
Vietnam China
Sri Lanka
Philippines Pakistan India
$5,000 Nigeria Cambodia
Bangladesh

$0
0% Growth of
2% Real GDP per Capita
4%(PPP-adjusted),6%
CAGR, 2003-20078% 10% 12%
Source: EIU (2008), authors calculations
 Vietnam’s new era
• Vietnam is entering a new era to
develop from (low) middle income to
higher income country and to catch
up
• From middle income to high income
requires 3 transitions:
- From diversification to
specialization
- From accumulation to creation
- From basic skill to advanced skill
 Catching up process (drawn by Kenichi
Initial FDI
Ohno, VDF)
Internalizing Internalizing Internalizing
parts and skills and innovation
absorption
components technology
Creativit
Technology y STAGE FOUR
absorption
Full capability in
STAGE innovation and
Agglomeratio THREE product design
n as global leader
STAGE TWO Technology &
management Japan, US, EU
Have mastered, can
supporting produce high
STAGE ONE
industries, but quality goods
Simple still under Korea,
manufacturing foreign Taiwan
under foreign Thailand,
guidance
guidance Malaysia Glass ceiling for
Vietna ASEAN countries
m (Middle income trap)
 Vietnam’s new
challenges
• AFTA, ASEAN plus, WTO, FTAs… large inflows of
China, ASEAN and other imported products may
challenge VN’s industrial base and industrialization
program
• Vietnam’s wage becoming too high for labor-
intensive industries, but technology too low for
knowledge-intensive industries  hard to move to
higher position in regional / int’l value chain.
• Vietnam needs a wise industrialization strategy to
increase internal value in manufacturing and
efficiently participate in global production network
• Reforms so far have been insufficient for Vietnam to
take off. Vietnam needs a new reform strategy - a set of
interrelated policy changes, institutional structures, and
rigorous implementation mechanisms.
• Sufficient market mechanism is most needed to create
conducive environment for business development
• Need to enhance the role of the State to facilitate the
development, promote innovations and manage risks
• The next several years will determine whether Vietnam
will follow the experience of Asian dragons or not
 Factors with strong impacts on
Vietnam’s economy today and in
future
Multilateral & Bilateral & BRIC and int’l VN’s reform
WTO regional shocks and policy
commitments commitments (prices, crisis) response
(East Asia,
major partners)
NEW THINKING AND DEVELOPMENT
MODEL
VN’s
ECONOMY

Real Macro HRD, social Institution

economy economic development (legislative &
(investment, stability & regulatory
infrastructur (inflation, environment system,
enforcement)
e, industry BOP) 29
growth)
 Strategy for Vietnam’s
economic development 2011-
2020
• Objectives:
- Avoid “middle income trap” (catching up
and narrowing income gap)
- Safety: social stability, sustainable
development / environment protection, and
safety of financial system
 New model for growth and development
needed
 Breakthrough: Economic
restructure
• Two key issues:
- Strengthen conditions for taking off and
long term growth: institution, human
resource & infrastructure
- Shift to new model for growth in which:
(1) allocation of resources must base on
market principles (no monopoly or
privileges)
(2) focus on quality, efficiency of growth
and higher value in int’l production chain
 Some suggested areas
• Institutional breakthrough:
+ Reforms of SOEs and large state economic
groups
+ Develop land and real estate market
+ Administrative reform
• Structural breakthrough:
+ Structure of economic regions (provinces)
+ Supporting industry development
+ Two hightech industrial zones
+ Tourist clusters
 Proactive participation in economic
coordination
among
Factor
neighbors
Context for
to enhancing
Related and
productivity
Regional
Factor Context for Demand Related and Macroeconomic Regional
Demand Macroeconomic Strategy
(Input)
(Input) Strategy
Strategy Conditions
Supporting
Supporting Competitiveness Strategy&&
Conditions and Conditions Competitiveness Governance
Conditions andRivalry
Rivalry Industries
Industries Governance

• Improving regional • Eliminating • Harmonizing • Facilitating cross- • Coordinating • Creating a

transportation trade and environmental border cluster programs to regional marketing
infrastructure investment standards upgrading, e.g. improve public program
• Creating an efficient barriers within • Harmonizing – Tourism safety • Sharing best
energy network the region product safety – Agribusiness • Coordinating practices in
• Enhancing regional • Simplifying and standards – Transport & macro-economic government
communications harmonizing • Establishing Logistics policies operations
and connectivity cross-border reciprocal – Business • Creating regional
• Linking financial regulations consumer services institutions
markets and paperwork protection laws – Dispute
• Opening the • Coordinating • Opening resolution
movement of anti-monopoly government mechanisms
students for higher and fair procurement – Regional
education competition within the region development
• Harmonizing policies bank
administrative • Developing a
requirements for regional
businesses negotiating
position with
international
organizations
Utilize VN’s location in the heart
of a dynamic region

34
with vigorous exchange of ideas…

35
and strong intra regional investment
flows

36
Thank you very much
for your attention!

phamchilan@gmail.com